Hayden Island strip mall at the heart of state rules tussle

Fast-forward a decade, and the new owners of Café del Toro are serving frozen burritos cooked in the microwave.

Café del Toro morphed into a 'lottery deli,' like the majority of the 12 bars and restaurants at Hayden Island Harbor Shops. Each of the dozen storefronts crammed into the tiny retail strip opposite Jantzen Beach SuperCenter hosts six video lottery terminals, on contract with the Oregon State Lottery. A majority of the establishments, like Café del Toro, appear to be getting the bulk of their earnings from the heavily used electronic slot machines - a combined $1.9 million in the 2009-10 fiscal year.

'The bigger question is why do they allow these establishments that are clearly gambling establishments to exist in the first place?' asks Steve Novick, a candidate for Portland city commissioner. Novick, a lawyer by training, says it bothers him to see the lottery delis operate in apparent violation of the Oregon Constitution's ban on non-tribal casinos in Oregon.

Lottery officials maintain that the lottery delis aren't violating the state Constitution, so long as they collect more than half of their gross sales from food, alcohol, cigarettes and other non-gambling sources.

'I don't think the delis are casinos or mini-casinos; I absolutely do not,' says Steven Ungar, chairman of the Oregon State Lottery Commission and a lawyer at Lane Powell in Portland.

But some economists, Hayden Island neighborhood leaders and politicians say the measure of a true casino should be how it earns its profits, not its gross sales.

'Losing money on cigarettes shouldn't enable you to say you're not really a casino,' says Ron Schmidt, chairman of the Hayden Island Neighborhood Network. 'I think if all the profits come from gambling, they're a casino and should be shut down.'

Lengthy debate

In a 1994 decision, Oregon's Supreme Court ruled that the test for whether a lottery retailer violated the Constitution was if its 'dominant use' and/or 'dominant purpose' was gambling. But those terms were not defined by the court.

Later that year, the Oregon State Lottery Commission adopted an interpretation that lottery retailers aren't casinos if they get no more than two-thirds of their gross revenue from gambling. The lottery didn't bar retailers from offering cheap cigarettes, booze and food, much like Las Vegas casinos, to lure gamblers and bump up non-lottery revenue to at least a third of gross sales.

In 1999, the lottery got stricter, changing the casino rule so that no more than 60 percent of retailers' gross sales could come from gambling.

But the number of retailers adopting the lottery deli format pioneered by Dotty's Deli kept growing. In a 2000 audit, Oregon Secretary of State Bill Bradbury found that 'the delis were essentially acting as casinos.' State auditors found that six of the 42 retailers evaluated were earning more than 60 percent of their gross sales from gambling.

In 2007, then-state Lottery Director Dale Penn vowed to revisit the casino prohibition rules. The main result: no more than 50 percent of a retailer's gross revenue can come from gambling.

That prompted some lottery delis to emphasize their food service more, and perhaps reduce prices on alcohol and cigarettes.

No simple legal test

Critics say the lottery delis wouldn't even be in business if it weren't for gambling.

Ungar says that's not a fair legal test, as many traditional bar and restaurant owners openly admit that the state lottery is an economic lifeline.

'There are hundreds of retail locations that, according to what they tell us, that if it wasn't for the lottery, they would have trouble paying their bills and staying in business,' he says. 'Does that make it a casino? I don't think so.'

But the issues are different with lottery delis, which, like Cafe del Toro, tend to offer food as an afterthought.

The festering situation in Jantzen Beach is bringing new attention to the issue, however.

Tomei says she's working behind the scenes to get the lottery and Oregon Liquor Control Commission, or OLCC, to be more responsive to neighbors, and reduce the concentration of lottery bars in places like Jantzen Beach and Milwaukie.

State Rep. Tina Kotek, D-Portland, who represents the Jantzen Beach area, says people are astounded when she tells them what the state has allowed to transpire at Lottery Row. 'It's really affected the livability of Hayden Island,' Kotek says.

She notes that the OLCC is granting liquor licenses to lottery delis based on the businesses offering food service, a prerequisite to getting the licenses. Yet the delis are 'nothing even remotely close to being a restaurant,' Kotek says. Liquor licenses are a prerequisite to getting a license to operate video lottery terminals.

Kotek, the new House Democratic leader, says that if the lottery doesn't do something about Jantzen Beach and the lottery delis, the Legislature needs to revisit the 50 percent rule and how it's only applied to gross revenue, via a new statute.